This document is not an official pronouncement of the law or the position of the Service and cannot be used, or cited or relied upon as such.

Government Regulatory Requirements

A. Federal Requirements

Environmental Protection Agency - In general the industry falls under Federal regulation with respect to environmental clean up, hauling of hazardous waste, and various other pollution regulations such as the Clean Air Act.

Under the Code of Federal Regulations (CFR) 40, Parts 85,89 and 92 the EPA established emission standards for locomotives and locomotive engines in 1998. The standards took effect beginning in 2000, but are being phased in gradually for existing Class I fleets as locomotives are "remanufactured", as defined by EPA. For new locomotives the standards apply beginning in the 2001 model year. The standards apply to railroads and manufacturers alike. Smaller railroads as defined by the Small Business Administration, are exempt from the regulations as they apply to "remanufacture". According to the regulations, the EPA intended to encompass the remanufacturing practices of Class I railroads, and not those of the rest of the industry.

In May 2004, as part of the Clean Air Nonroad Diesel Rule, the EPA finalized new requirements for nonroad diesel fuel that will decrease the allowable levels of sulfur in fuel used in locomotives by 99 percent.

In March 2007, EPA proposed a three part program that would dramatically reduce emissions from diesel locomotives of all types; line-haul, switch, and passenger rail. The proposal aims to cut particulate matter emissions from these engines by 90 percent and nitrogen oxides emissions by 80 percent.

The proposal would set new, Tier 3 exhaust emissions standards and idle reduction requirements for locomotives that would begin in 2009. The proposal would also tighten emission standards for existing locomotives when they are remanufactured to take effect as soon as certified systems are available (as early as 2008) but no later than 2010. Finally, the proposal would set long-term, Tier 4 standards for newly-built engines based on the application of high-efficiency catalytic after treatment technology, beginning in 2015 for locomotives.

Federal Railroad Administration - The primary responsibility of the FRA is safety. The FRA finds its authority to regulate safety in the railroad industry under the Code of Federal Regulations at Title 49. Among its regulations are the following, which interface with IRS audit issues, all found at Title 49, Subtitle B, Chapter II, Parts 200 - 266:

By law, FRA has the responsibility for ensuring railroad safety throughout the Nation. To monitor railroad compliance with Federally mandated safety standards; FRA employs more than 415 inspectors operating out of 8 regional offices nationally.

FRA's traditional site-specific safety inspection program has produced substantial gains in railroad safety. Between 1978 and 1993, the number of railroad accidents declined by more than 75 percent. The railroad accident rate per million train miles dropped by more than two-thirds, and the number of rail-related fatalities and injuries fell by three-fourths during this period. These substantial safety improvements occurred even as freight railroad traffic and train density increased to record high levels following economic deregulation of the industry as a result of the Staggers Rail Act of 1980.

Beginning in 1993, FRA reassessed its safety program to focus on results. The new Safety Assurance and Compliance Program (SACP) is intended to complement FRA's traditional safety enforcement program with a comprehensive approach in which SACP participants work with FRA to identify and correct root causes of problems across an entire railroad system. The office of SACP oversees and manages the day-to-day operations of the five rail safety disciplines: Motive Power and Equipment; Operating Practices; Hazardous Materials; Track; and Signal and Train Control.

More information on FRA's approach to safety and regulation and its accomplishments can be found through use of their website. (See "Useful Websites at section XI.A below.)

Surface Transportation Board - The Surface Transportation Board (STB) was created by the Interstate Commerce Commissioner Termination Act of 1995 at the same time the Interstate Commerce Commission (ICC) was abolished. The STB was created to replace the ICC.. The STB is an independent adjudicatory and regulatory body administratively affiliated with the Department of Transportation, responsible for the economic regulation of interstate surface transportation, primarily railroads, within the United States. The STB's mission is to ensure that competitive, efficient, and safe transportation services are provided to meet the needs of shippers, receivers, and consumers. The STB has jurisdiction over:

Railroad rate and service issues,

Rail restructuring transactions (mergers, line sales, new line construction, and old line abandonments),

Rates and services of certain pipelines not regulated by the Federal Energy Regulatory Commission.

The Code of Federal Regulations, Title 49, Subtitle B, Chapter X, Parts 1000 - 1300 provides the STB's authority over the nation's railroads.There are many STB functions that are relevant to IRS examinations.The ISP maintains a complete copy of Title 49.Among the pertinent regulations are:

Part 1005 Loss & damage and salvage claims processing
Part 1150 Certificate to construct, acquire, and operate a rail line
Part 1152 Abandonment of rail line
Part 1180 Railroad acquisition, control, merger, consolidation, trackage rights & lease procedures
Part 1201 Uniform System of Accounts (USOA)
Part 1241 Annual Reports Form R-1
Part 1245 Annual reports of employees, service, and compensation
Part 1262 Uniform system of records of property changes

Part 1152 Abandonments of Rail Line - The STB requires carriers to submit application for approval to abandon existing lines. In some instances the abandoned line is made available for the Rails to Trails program. Railroads also donate the right of way to municipalities for use in passenger (light rail) service. The rights of way are also at times sold to municipalities for continued use as either freight or scenic railroads. In these instances, application for abandonment is often made, even though the abandonment does not ultimately take place.

An important part of the abandonment application process is the computation of net liquidation value. Subpart D of Part 1152, starting at 1152.30 specifies the requirement for computation of Return on Value. This computation requires the computation of net liquidation value per 1152.34(c)(1)(iii): "The net liquidation value for the highest and best use for non-rail purposes…shall be determined by computing the current appraised market value of such properties…less all costs of dismantling and disposition of improvements necessary to make the properties available for their highest and best use." In the event that a railroad claims a deduction for the donation of a property, copies of the application and computations submitted by the railroad to STB should be requested in order to make comparisons of the net liquidation value with other taxpayer supplied appraisals.

Part 1180 Railroad acquisition, control, merger, consolidation, trackage rights & lease procedures - when one of these events occurs, the railroad taking the action must submit application to the STB.At the conclusion of the process, a Finance Docket is prepared by the STB.This package contains all information pertinent to the transaction and the approval process.Copies of the finance docket can be obtained from the STB through the ISP and may also be available off the STB website.One tax implication of railroad mergers is the award of trackage rights

Part 1201 Uniform System of Accounts (USOA) - this part of the CFR specifies the accounting codes (chart of accounts) that railroads are required to use for regulatory purposes.It also details accounting requirements for selected types of transactions.Among these are treatments of equipment rebuild costs, track maintenance costs, minimum capitalization rules, certain accrued liabilities, estimated liabilities and others.For financial and accounting purposes, a railroad may also maintain its own unique system of accounting, separate from the STB system.Reports to the STB must be in conformity with the USOA.See Section V.A. above for details regarding the USOA.

Part 1241 Annual Reports Form R-1 - Class I railroads must file annual reports with the STB containing all significant accounting results.This report includes information of significance to Federal income tax examinations.A copy should be obtained from the railroad.Excerpts from the R-1 are available on the STB website.Some of the information included in the R-1 that can impact an examination are the number of freight cars rebuilt, the miles of rail laid, and the number of crossties installed and related costs of same.

Part 1262 Uniform system of records of property changes - these regulations prescribe the records to be maintained with respect to railroad construction projects.Every railroad will maintain them.Included are:

Authority for Expenditure (AFE)

Register for AFEs

Completion Report for Projects

Records of Property Changes

Part 1245 Annual reports of employees, service, and compensation - information submitted to the STB under these regulations can be useful in the examination of Form CT-1 filed by all railroad employers for RRTA liabilities.

Railroad Retirement Board -the Railroad Retirement Board (RRB) is responsible for administering comprehensive retirement-survivor and unemployment-sickness benefit programs for the nation's railroad workers and their families, under the Railroad Retirement Act and the Railroad Unemployment Insurance Act. Their activities and responsibilities are similar to those of the Social Security Administration. Likewise, the IRS' responsibilities with respect to the Railroad Retirement Tax Act, RRTA, parallel those of the IRS under the Social Security system.

Code of Federal Regulations Title 45 - Railroads-CITE- 45 USC TITLE 45 - Title 45 of the CFR covers a variety of regulations impacting railroads. Included among its chapters are: